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Passing of tax deadline day is reminder of tax gap, IRS job

Millions of Americans had the Internal Revenue Service on their minds with the deadline for filing federal income taxes. The IRS is a government agency that everybody loves to hate, or at least complain about. But some, if not most, of that anger is misplaced.

The IRS is the government agency responsible for collecting revenue to fund the federal government.

Granted, the IRS has come under some deserved criticism over allegations that some of its people were involved in a politicized effort to deny conservative, tea party affiliated groups from receiving tax exempt status. While the IRS should not support or thwart political activities on either the right or left, there are legitimate questions about these largely political groups that are labeled “social welfare” groups to earn tax-exempt status.

Beyond that controversy, the IRS has a major role in implementing ObamaCare. The tax-collecting agency will be responsible for imposing fines, or withholding tax refunds, from uninsured people who have not signed up for health insurance coverage. The IRS must also verify the income of those seeking ObamaCare subsidies, to ensure that only those deserving the taxpayer subsidies receive them.

But while the IRS has these new responsibilities, the agency’s funding has not grown to handle the additional workload.

Responding to the general dislike of the IRS as the tax-collector and fueled by many Republicans’ belief that IRS personnel revealed partisan leanings in giving extra scrutiny to conservative groups seeking 501c(4) status, Congress cut IRS funding. In 2010, the IRS budget was $12.1 billion. This year, the agency’s budget fell to $11.3 billion.

Apart from its new role in ObamaCare, the biggest longterm problem facing the IRS — and all honest taxpayers — is the tax gap, which is the difference between the amount of taxes owed and the amount collected.

The latest estimates are that the annual tax gap is at least $385 billion. Some of that uncollected money is lost through wealthy Americans using offshore accounts or stashing money in Swiss bank accounts. Federal law enforcement officials made some progress after fining Swiss banks and pressing them to reveal account holders from the U.S. who use the accounts to avoid taxes. Another major part of the tax gap comes from small businesses that understate income or overstate expenses, to fraudently reduce their tax bill.

A new problem for the IRS is to identity theft that has crooks geting tax refund checks meant for someone else.

All of these examples of tax cheating and theft require IRS manpower — and without a growing budget the IRS cannot devote enough resources to compliance.

While some people might take satisfaction in seeing the IRS budget cut, it’s misplaced pleasure because less enforcement to catch tax cheats means that honest taxpayers will pay more, or the deficit will grow — or both.

Congress should increase, not decrease, the IRS budget when it’s been shown that for every $1 added to enforcement efforts an additional $6 in tax revenue is collected.

Another example of misplaced anger with the IRS has to do with the overly complicated and loophole-ridden tax code. The job of the IRS is to collect taxes and enforce the tax code. The insanely complex tax code and the lucrative tax loopholes for certain politically powerful interest groups, industries or companies were put there by Congress. These groups bought and paid for the tax loopholes through lobbying and campaign contributions to members of Congress. The IRS has nothing to do with the tax code, other than enforcement.

The IRS has not always been customer friendly and sometimes it has abused its power. And certainly there should be no politics when it comes to granting tax exempt status. But the agency often gets a bad rap because of misplaced anger over taxes, which should be directed at Congress.

And for every honest taxpayer, the message to Congres should be to close the tax gap, stop tax cheating.

Honest taxpayers should ask themselves if they benefit from more tax cheats — large or small — getting away without paying their fair share. The answer is no, they do not. And that should lead to support for an increased IRS budget, earmarking most of the additional money for more enforcement to close the tax gap, making the income tax system more fair by making sure everyone pays their fair share.

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